Short Answer Questions:

1) Compute various indicators of the state of the labour market using the following information. Please show all of your working. If you do not, you will receive zero marks for the question(s).

a) What is the size of the labor force in this economy?

b) Calculate the Labor Force Participation Rate for this economy. Report as a percentage to two decimal places.

c) Calculate the Unemployment Rate for this economy. Report as a percentage to two decimal places.

d) Suppose that the natural rate of unemployment is considered to be 5%. What is the rate of cyclical unemployment? Report as a percentage to two decimal places.

2)

Below you can find the per capita real GDP of the 13 countries who have joined the European Union (EU) in 2004 (except for Turkey), and the EU average in 1999 (both in Column A). It also gives the GDP per capital growth rates in 2000 (Column B). Let us assume that countries will keep growing at the given rates until these countries reach the level of the EU average. Answer the following questions and explain your answers and show all of your working (in order to obtain partial marks).

a) Just observing the above table (doing no calculations), are there any countries that will not be able to catch up to the level of per capita income in the EU based upon the assumption we have made?

b) Fill in the information for Column C and D in the above table for Hungary (where it is marked as Q2b). And then, using the Rule of 70 from the textbook, how many years will the ratio of Hungary's GDP to EU average GDP take to double (hint: the growth rate of a fraction is approximately equal to the growth rate of the numerator minus the growth rate of the denominator)? How many years do you think it will eventually take real GDP per capita of Hungary to reach that of EU average?

c) The above calculation in part b) is based on the assumption that a country's real GDP grows at a constant rate. But in reality it does not. Why is that?

3) In this question you analyze the effects of the following economic policies in the loanable funds market diagram where we have the real interest rate on the vertical axis and the quantity of loanable funds on the horizontal axis.

a) Demonstrate and explain the effect of a government tax increases in the loanable fund market. Which of the curves is affected by this-supply or demand-and what direction does it move. Your explanation must also include what happens to the real interest rate, the level of national savings, and the level of investment as well.

b) Now you realize that the tax increases that you analyzed above also affect the (after- tax) profitability of new investment. How would this change your explanation in Part a)? Again, use the loanable funds model to demonstrate this effect.

4) The level of government debt is a growing concern for the current Australian Treasurer Joe Hockey who has the responsibility of managing the government budget. Summaries the key arguments on the debate around Australian government debt and deficit for the Abbott government. Your summary must address the following; what is the major concern of running government deficits, what is the economic reasoning to have a balanced budget and when might a budget deficit/surplus be ok? Conclude by briefly discussing what policies you would suggest Joe Hockey implement to balance the budget and why. The summary should be at least half a page in length.